Some Links #6: We are all Keynesians now. Yeah, but which type?

You may have heard of Professor Joseph Stiglitz – he’s the Nobel laureate economist who correctly predicted the global crash. He’s distinctly unimpressed with Osbourne’s budget. This, he predicts, will make Britain’s recovery from recession longer, slower and harder than it needs to be. The rise in VAT could even tip us into a double-dip recession. He took time to offer George Osbourne a bit of advice – which will probably go unheeded, because Osbourne’s objectives aren’t necessarily to improve the economy. They are an ideological attack on the state, with the intention of shrinking it by forty percent.

The basis for this is part Keynesian, and has been echoed by other commentators such as Johann Hari, in that we must spend our way out of economic woes. Now I must admit I’m not too fond of how Osborne is going about reducing deficit (raising VAT… huh?), but, for reasons that’ll become apparent below, I do think we need to tackle the deficit.

Be careful not to confuse economics with politics (or economists with politicians). The International Perspective blog refers to an article by Peter Schiff, G20: The New Ideological Divide, which discusses two opposing political camps of Stimulators and the Austereians. Besides sounding like a brand of dildo and a group super boring villains, these two camps differ in their respective opinions on how to deal with the economy: Stimulators want to spend their way out of trouble, whilst Austereians want to cut back on spending and prioritise the paying of our debts. But what I want to draw your attention to is the following paragraph on the blog (which by the way isn’t too keen on either perspective):

You see, I’m not an enemy of Keynesianism, far from it. But I am aware that there are two pieces to the late, Mr Keynes’ theory. One piece which suggests that the government should intervene to borrow and spend during periods of economic retraction. And the other piece which suggests that, in order to fund this expenditure, government should save (run surpluses) during economically benign periods.

So really, the current stimulus packages are spending from a situation of debt, rather than from savings. I think this is quite dangerous given the build up of hidden risk. This was also covered in another post, One sided, Retro-active Keynesianism, which raised the question of what type of Keynesian are you?:

Firstly, pro-active Keynesian policy: the notion that during times of economic growth and prosperity one should save and reserve a surplus of capital so that during economic recessions this utility can be used to cushion the severity of a downfall. Perhaps China came the closest to this style of cycle management. The second type is retro-active Keynesian policy: the notion that we can afford to spend and incur debt during boom times and then simply use a Keynesian justification to plough ourselves further into debt during economic darkness.

Losing Nemo 2 — clownfish swim towards predators as CO2 levels rise. I did laugh at this post by Ed Yong, but it does raise some serious issues about the impact of increasing levels of CO2 dissolved in water and how it can muddle a clownfish’s sense of smell, which, despite not seeming that important, is in fact crucial for finding shelter and avoiding threats.

99 problems but the rich ‘aint one. Coming full-circle and I’m back on economics… Mind Hacks discusses why traditional economic models don’t apply the poor. Specifically, it focuses on a book by Charles Karelis, The Persistence of Poverty: Why the Economics of the Well-off Can’t Help the Poor, and how, from the perspective of an economist, poor people act irrationally:

When we’re poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems.

2 thoughts on “Some Links #6: We are all Keynesians now. Yeah, but which type?”

Not if the very same stimulus packages are increasing the levels of debt (an embodiment of hidden risk) that might very well plunge us into another recession. Hence my point about spending from a situation of savings, rather than from one of debt.